Overview: Chicago Fed’s National Activity Index report, May, 2014

The Chicago Fed’s National Activity Index (or CFNAI) is one of the key gauges of economic activity. Unlike the regional manufacturing surveys conducted by the Federal Reserve Banks of other districts, the CFNAI is a nation-wide measure. As a result, the report is often market-moving and influences both stock (VOO) and bond (AGG) market prices. The Chicago Fed will release the results of May’s survey on Monday, June 23.

Economic growth moderated in April compared to March. The headline index reading for the CFNAI fell to -0.32 in April, compared to 0.34 in March. Production declines were one of the key reasons for the fall in the index, with production-related indicators falling to -0.37 in April, compared to 0.27 in March.

One of the four indices tracked by the survey, the CFNAI-MA3 increased to 0.19—its highest level since November, 2013. The reading implied that economic growth for April was above-average or above-trend.

Key components that bear watching in May’s survey

Consumption and housing will be the key sectors to watch for in this month’s release. While home sales for April were ahead of consensus, housing starts for May were disappointing. Retail figures in the month of May were also sub-par. These factors are likely to act as a drag on the CFNAI for May.

However, production and labor market indicators should prove positive for the CFNAI. Most regional manufacturing surveys along with the Purchasing Managers Index (or PMI), have reported an uptick in activity. Monthly job creation is also approaching healthy levels and the level of nonfarm payrolls is almost at pre-recession levels.

The production components of the CFNAI are closely watched by financial market participants. These can reveal broader trends in the manufacturing sector and influence the market prices of ETFs like the Vanguard Industrials ETF (VIS), which includes stocks like Union Pacific and United Parcel Service. The two companies are also part of the iShares Transportation Average ETF (IYT) and the S&P 100 Index (OEF).

What is the CFNAI?

The CFNAI is a national monthly index which estimates overall economic activity and related inflation. Since economic activity tends toward long term average growth rate over time, a positive index reading implies the economy is growing above the historical trend rate of growth while a negative index reading corresponds to below-average rate of growth. A reading of zero indicates the economy is growing at historical trend rate of growth.

The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The derived index provides a single, summary measure of a factor common to these national economic data.

In the next section, we’ll analyze the outlook for one of the most important indicators for the whole economy—the gross domestic product (or GDP).

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